Six Facts Lost in the IRS Scandal

Posted on May 26, 2013

In the furious fallout from the revelation that the IRS flagged applications from conservative nonprofits for extra review because of their political activity, some points about the big picture — and big donors—have fallen through the cracks.

Consider this our Top 6 list of need-to-know facts on social welfare nonprofits, also known as dark money groups because they don’t have to disclose their donors. The groups poured more than $256 million into the 2012 federal elections.

1. Social welfare nonprofits are supposed to have social welfare, and not politics, as their “primary” purpose.

A century ago, Congress created a tax exemption for social welfare nonprofits. The statute defining the groups says they are supposed to be “operated exclusively for the promotion of social welfare.” But in 1959, the regulators interpreted the “exclusively” part of the statute to mean groups had to be “primarily” engaged in enhancing social welfare. This later opened the door to political spending.

So what does “primarily” mean? It’s not clear. The IRS has said it uses a “facts and circumstances” test to say whether a group mostly works to benefit the community or not. In short: If a group walks and talks like a social welfare nonprofit, then it’s a social welfare nonprofit.

This deliberate vagueness has led some groups to say that “primarily” simply means they must spend 51 percent of their money on a social welfare idea—say, on something as vague as “education,” which could also include issue ads criticizing certain politicians. And then, the reasoning goes, a group can spend as much as 49 percent of its expenditures on ads directly advocating the election or defeat of a candidate for office.

Nowhere in tax regulations or rulings does it mention 49 percent, though. Some nonprofit lawyers have argued that the IRS should set hard limits for social welfare nonprofits—setting out, for instance, that they cannot spend more than 20 percent of their money on election ads or even limiting spending to a fixed amount, like no more than $250,000.

So far, the IRS has avoided clarifying any limits.

2. Donors to social welfare nonprofits are anonymous for a reason.

Unlike donors who give directly to politicians or even to super PACs, donors who give to social welfare nonprofits can stay secret. In large part, this is because of an attempt by Alabama to force the NAACP, then a social welfare nonprofit, to disclose its donors in the 1950s. In 1958, the Supreme Court sided with the NAACP, saying that public identification of its members made them at risk of reprisal and threats.

The ACLU, which is itself a social welfare nonprofit, has long made similararguments. So has Karl Rove, the GOP strategist and brains behind Crossroads GPS, which has spent more money on elections than any other social welfare nonprofit. In early April 2012, Rove invoked the NAACP in defending his organization against attempts to reveal donors.

The Federal Election Commission could in theory push for some disclosure from social welfare nonprofits—for their election ads, at least. But the FEC has been paralyzed by a 3-3 partisan split, and its interpretations of oldercourt decisions have given nonprofits wiggle room to avoid saying who donated money, as long as a donation wasn’t specifically made for a political ad.

New rulings indicate that higher courts, including the Supreme Court, favor disclosure for political ads, and states are also stepping into the fray. During the 2012 elections, courts in two states— Montana and Idaho — ruled that two nonprofits engaged in state campaigns needed to disclose donors.

But sometimes, when nonprofits funnel donations, the answers raise more questions. It’s the Russian nesting doll phenomenon. Last election, for instance, California’s election agency pushed for an Arizona social welfare nonprofit to disclose donors for $11 million spent on two California ballot initiatives. The answer? Another social welfare nonprofit, which in turn got the money from a trade association, which also doesn’t have to reveal its donors.

3. The Supreme Court’s Citizens United decision meant that corporations could pay for political ads, anonymously, using social welfare nonprofits.

In January 2010, the Supreme Court ruled that corporations and unions could spend money directly on election ads. A later court decision made possible super PACs, the political committees that can raise and spend unlimited amounts of money from donors, as long as they don’t coordinate with candidates and as long as they report their donors and spending.

Initially, campaign finance watchdogs believed corporations would give directly to super PACs. And in some cases, that happened. But not as much as anyone thought, and maybe for a reason: Disclosure isn’t necessarily good for business. Target famously faced a consumer and shareholder backlash after it gave money in 2010 to a group backing a Minnesota candidate who opposed gay rights.

Many watchdogs now believe that large public corporations are giving money to support candidates through social welfare nonprofits and trade associations, partly to avoid disclosure. Although the tax-exempt groups were allowed to spend money on election ads before Citizens United, their spending skyrocketed in 2010 and again in 2012.

A New York Times article based on rare cases in which donors have been disclosed, sometimes accidentally, explored the issue of corporations giving to these groups last year. Insurance giant Aetna, for example, accidentally revealed it gave $3 million in 2011 to the American Action Network, a social welfare group founded by former Sen. Norm Coleman, a Republican, that runs election ads.

Groups that favor more disclosure have so far failed to force action by the FEC, the IRS, or Congress, although some corporations have voluntarily reported their political spending. Advocates have now turned to the Securities and Exchange Commission, which is studying a proposal to require public companies to disclose political contributions.

4. Social welfare nonprofits do not actually have to apply to the IRS for recognition as tax-exempt organizations.

With all the furor over applications being flagged from conservative groups—particularly groups with “Tea Party,” “Patriot” or “9/12” in their names—it’s worth remembering that a social welfare nonprofit doesn’t even have to apply to the IRS in the first place.

Unlike charities, which are supposed to apply for recognition, social welfare nonprofits can simply incorporate and start raising and spending money, without ever applying to the IRS.

The agency’s nonprofit wing is mainly concerned about ferreting out bad charities, which are the biggest chunk of nonprofits and the biggest source of potential revenue. After all, the IRS’s main job is to collect revenue. Charities allow donors to deduct donations, while social welfare nonprofits don’t.

Most major social welfare nonprofits do apply, because being recognized is seen as insurance against later determination by the IRS that the group should have registered as a political committee and may face back taxes and disclosure of donors. A recognition letter is also essential to raise money from certain donors—like, say, corporations.

But some of the new groups haven’t applied.

The first time the IRS hears about these social welfare nonprofits is often when they file their first annual tax return, not due until sometimes more than a year after they’ve formed.

In many cases, the first time the IRS hears about these groups is a full year after an election.

5. Most of the money spent on elections by social welfare nonprofits supports Republicans.

Of the more than $256 million spent by social welfare nonprofits on ads in the 2012 elections, at least 80 percent came from conservative groups, according to FEC figures tallied by the Center for Responsive Politics.

None came from the Tea Party groups with applications flagged by the IRS. Instead, a few big conservative groups were largely responsible.

Crossroads GPS, which this week said it believes it is among the conservative groups “targeted” by the IRS, spent more than $70 million in federal races in 2012. Americans for Prosperity, the social welfare nonprofit launched by the conservative billionaire brothers Charles and David Koch, spent more than $36 million. American Future Fund spent more than $25 million. Americans for Tax Reform spent almost $16 million. American Action Network spent almost $12 million.

Besides Crossroads GPS, each of those groups has applied to the IRS and been recognized as tax-exempt. (You can look at their applications here.)

All of those groups spent more than the largest liberal social welfare nonprofit, the League of Conservation Voters, which spent about $11 million on 2012 federal races. The next biggest group, Patriot Majority USA, spent more than $7 million. Planned Parenthood spent $6.5 million. VoteVets.org spent more than $3 million.

None of those figures include the tens of millions of dollars spent by groups on certain ads that run months before an election that are not reported to the FEC.

6. Some social welfare groups promised in their applications, under penalty of perjury, that they wouldn’t get involved in elections. Then they did just that.

Much of the attention when it comes to Tea Party nonprofits has focused on their applications and how the IRS determines whether a group qualifies for social welfare status.

As part of our reporting on dark money in 2012, ProPublica looked at more than 100 applications for IRS recognition. One thing we noted again and again: Groups sometimes tell the IRS that they are not going to spend money on elections, receive IRS recognition, and then turn around and spend money on elections

The application to be recognized as a social welfare nonprofit, known as a 1024 Form, explicitly asks a group whether it has spent or plans to spend “any money attempting to influence the selection, nomination, election, or appointment of any person to any Federal, state, or local public office or to an office in a political organization.”

The American Future Fund, a conservative nonprofit that would go on to spend millions of dollars on campaign ads, checked “No”in answer to that question in 2008. The very same day the group submitted its application, it uploaded this ad to its YouTube account:

Even before mailing its application to the IRS saying it would not spend money on elections in 2010, the Alliance for America’s Future was running TV ads supporting Republican candidates for governor in Nevada and Florida. It also had given $133,000 to two political committees directed by MaryCheney, the daughter of the former vice president.

Another example of this is the Government Integrity Fund, a conservative nonprofit that ran ads in last year’s U.S. Senate race in Ohio. Its application was approved after it told the IRS that it would not spend money on politics. The group went on to do just that.